HM Treasury get it wrong again! (ESC C16 withdrawal)

Pennywise

So, we have "entreprenneurs relief" where a small business owner can sell his business and only pay capital gains tax of 10% on it. This applies for gains of up to £5 million!

For years, there's been a relief, known as ESC C16 where the owner(s) of a limited company can close down their company and take out remaining funds subject to capital gains tax at the entreprenneurs relief rate of 10%.

Now, for some weird reason, HM Treasury have announced a new law coming into effect on 1 March 2012, saying that only the first £25,000 of company funds can be treated as capital subject to the 10% CGT rate. The balance above £25,000 will be taxed as a dividend, potentially up to 36%.

So, on the one hand, they say tax is only 10% when selling a business, but on the other hand, they've now brought in a new law saying that it could be up to 36% if you end up with more than £25,000.

So, basically, if you sell your shares in your company, it's 10% but as more commonly if you sell your "business" (as business buyers don't generally buy shares in companies), you're going to get hammered by up to 36% when you take out the money from your now-defunct company, it's business having been sold.

There's an alternative which is to pay a few thousand pounds to a professional liquidator in which case, then the full amount can be capital and subject to the 10%. But, that's only worth it for the larger values.

People with more modest funds of between say £25,000 and £50,000 are going to be hammered when they sell their business/close down their company. Pay more tax or pay a few thousand to a liquidator.

HMRC argue this is to avoid evasion/avoidance, but that argument doesn't hold water. Their own figures show no gain or loss in tax revenue. It won't prevent evasion because HMRC can object to the current ESC C16 clearance application but won't have any similar power to stop values under £25k under the new law, so it's more likely to increase avoidance and evasion.

If you think this may affect you, then please sign an e-petition that has been put up today. There is also an email address for comments direct to the Treasury.

http://www.hmrc.gov.uk/tiin/tiin-esc-c16.pdf

http://epetitions.direct.gov.uk/petitions/25190

sunshinetours

It was in fairness only supposed to be a temporary fix until laws were changed, hence its title of "ESC". However it was a useful one for companies selling up or closing down. I believe they are looking to simplify many of the oerly complex rules created under the previous administration and there arebound to be some casualties along the way sadly

As you rightly say however many smaller sales of under £100k are likely to be more heavily penalised if they choose to go the route rather than selling shares

Pennywise

And that's the crux. The smaller businesses don't have the option of selling shares in most cases. The buyer of the business often refuses to buy the company/shares, they'll only buy the business assets leaving the original owners holding onto a non trading limited company containing a lot of "trapped" cash. That already causes double taxation because of corporation tax on the proceeds of the assets sold.

This new law won't affect larger companies and groups who buy and sell companies regularly for far higher values than the average man in the street's company is worth. It's nothing but another cost/tax on the smaller business - those whom the Govt claim they are trying to help!

The ESC was brought in to deal with this issue and has been in existence for many years - in fact it was 1985, so that's about 26 years - hardly a temporary fix. It's worked well. It required prior HMRC approval and clearance, so that was an opportunity to prevent evasion and avoidance before it happened. There is no evidence to suggest there was any widespread abuse. Now the pre-approval route has been removed so it's a free for all. That means the honest pay more and the devious and dishonest pay less. Even HMRC's own document shows no increase in tax revenue from this change. How can that be when it clearly affects large numbers of small businesses unless they expect more avoidance/evasion from the less honest that won't be monitored anymore?

Rather than simply make the existing rule into law, which they could have easily done, they've decided to withdraw the benefit of it for potentially thousands of small businesses. For many people, their business is their retirement fund. To suddenly find themselves paying over double, if not treble the amount of tax they were expecting to pay is cruel and will badly affect their retirement plans.

John_Pierpoint

Perhaps being encouraged to incorporate a business and then later having to sell it as a going concern is in the national interest.

I have seen several potentially profitable businesses, if sold to a younger energetic proprietor, slowly and painfully run into the ground by a pensioner, who has failed to plan a succession.

sunshinetours

Entrepreneurs Relief (although not as generous as previous taper relief in its qualifying terms) encourages business sales

ESC C16 helped in the administration of asset sales for small businesses and as pennywise sai, worked well for these types of sales for many years. All that will now happen is more costs for vendors to formally close down companies via a liquidator (which costs between £3k and £5k depending on who you know!)